Bank economist warns fiscal gap means recovery may be short lived

The former member of the Bank of England Monetary Policy Committee made the comments to the Yorkshire Post following a trip to Bradford.

She said the slow growth in the eurozone was likely to hit the UK’s current account deficit, which remains very large.

She added that in a couple of years’ time this may lead to a big fiscal deficit “and history tells us that this is a recipe for a fall in sterling, the consequences of which are further upward pressure on prices and downward pressure on household income, which might make it difficult to sustain the recovery”.

She added that weaker sterling might help rebalance the economy towards exports, although the UK has not managed to achieve this so far.

Ms Barker said: “We are in a balance sheet recession in the way that Japan was. They lost a decade. When you look at how much growth we have lost relative to the previous trajectory, we are probably at least 10 per cent worse off.”

Ms Barker, who was on the MPC from 2001 until May 2010, described the Bank’s new forward guidance policy as “quite useful” in that the committee can be more explicit about its rate-setting intentions.

She dismissed fears of a housing bubble, saying that the mortgage market at some point was always going to get back to lending on smaller deposits and at that point house prices are likely to rise.

“The Government has decided to pull that forward,” she added.

Ms Barker spoke to an audience of business leaders at a lunch hosted by Bradford Chamber of Commerce and chamber president Paul Mackie at the Midland Hotel on Monday.